Economic Price Adjustment Update

1
Economic Price AdjustmentUpdate

• Chris Grassano
• Project Manager
• 3 February 2009

2
Status

• EPA Cost and Index methodologies have been
  refined.
• Working on methodology/guidelines for determining
  when EPA is appropriate
• New Modified Survey sent out to Ammo Sub Group
  on 21 Jan 2009. Includes
• Previous survey on Actual and Index Methodologies
  
• Modified survey seeking thoughts on when to
  include EPA
• Looking for completed surveys by mid Feb

3
Guidelines for Incorporating an EPA into a
Contract

• Historical volatility
• Review index - If index is not available,
  contractor to submit information to substantiate
  volatility during market survey and draft RFP
  process
• Anticipated volatility
• Comparison of current price vs. futures price if
  available
• What level of volatility is a threshold?
• Impact of the material to the procurement
• Material content in the overall unit price
• Quantity of units in the procurement
• What level of material is a threshold?
• Contract length
• How long should the contract be to warrant an
  EPA?

What Else?
4
EPA Guidelines

1. Should an EPA be used?

Consider Input from Market Survey
Has commodity experienced historical volatility
Yes
Does contract length warrant EPA?
Does commodity have significant impact to the
procurement?
Yes
Yes
Incorporate an EPA
No
Is commodity anticipated to have volatility?
No
No
Yes
No
Do Not Incorporate an EPA
Thoughts?
5
Selecting EPA Method
2) Selecting EPA Method
Do indices exist for raw material?
Is index method preferable for this procurement?
(PCO decision)
Does procurement represent single or multiple
purchases of raw material over a period of time?
Multiple
Yes
Yes
Index Method B (avg. Index value)
ICAP Members generally opposed to index averages,
especially annual averages
Single
Actual Cost Method
No
No
Index Method A (discrete index value)
3) Tailoring Clause Terms Conditions
Select Specific Index
Select Cap
Select Threshold
Issue DRAFT RFP
Bureau of Labor Statistics, London Metals
Exchange?
/- 3 ?
Max 50 annual upward adjustment?
Any Additional Thoughts?
6
EPA Timelines Execution
Index Method Timeline
45 Days in Advance Contemplation Letter
25 Days in Advance Contractor Response
Award
Award
45 Days in Advance Contemplation Letter
25 Days in Advance Contractor Response
PCO Issues Request for Actual Data
Contractor Response
PCO Mods Contract
After Award Method
Prior to Award Method
Actual Cost Method Timelines
Thoughts?
7
Best Method Varies by Situation

• Certain raw material costs known to be volatile,
  addressing them during draft RFP process
• Offeror should suggest raw materials for
  inclusion in EPA clause
• If raw material can be tracked with an index,
  offeror can suggest an appropriate index
• If raw material hard to track with an index, two
  ways to handle
• Actual cost method
• If sole source, negotiate higher profit for
  higher risk

Three Survey Responses to Date Need Your Input to
Achieve an Optimal Solution